Why It is a Good Time to be Active in This Market

NEWPORT BEACH, CA—In this exclusive interview below with Philip D. Voorhees, vice chairman of CBRE National Retail Partners-West, we learn more about secondary and tertiary markets, why retail is currently out of favor with the institutional cohort and some good advice for today’s CRE investor.

GlobeSt.com:  What is your best advice for today’s commercial real estate investor?

Philip D. Voorhees: Go long! No matter how you slice it, this has been a long, positive cycle for the economy and commercial real estate. Since early November 2018, the US 10-Year Treasury Yield – the global “risk-free yield” and a key benchmark for commercial lending – has cut in half, falling from 3.27% to about 1.57% as I type. This is within 25 basis points of the lowest 10YT yield since the 1960s. While the global slowdown may very well push the 10YT lower, the debt markets are flush and long-term, fixed-rate debt, available with full-term, interest-only (I/O) period at modest loan-to-value levels, and effective financing rates are at or near historic lows. Just off-of-core – really good but not perfect assets – cap rates gap widely, creating historically-wide cap-rate-to-10YT spreads, providing some of the greatest leveraged cash-on-cash-return opportunities I’ve seen in my two decades in the business.

GlobeSt.com: What are your favorite property types and why? Voorhees: Thus far, retail is the only product type to experience a mid-cycle correction coming out of the 2016 holiday season, perhaps bottoming in early 2018. Retail is currently out of favor with the institutional cohort, providing historically great buying opportunities. Core-plus retail in the primary and secondary western US markets can be acquired at cap rates 450-550 basis points, producing  double-digit cash-on-cash yields with modest, interest-only leverage. The onslaught of media negativity regarding retail centers primarily on mall and power center product types, and on tenants that either should have gone out of business already or are owned by private equity; in some cases, both. If you are reading this and you’ve NOT had a retail shopping experience – food, beverage, service or buying something from a retailer, I should buy you lunch and get you out into the world! Retail is here to stay!

As a sidebar, B and C quality, renter-by-necessity multi-family seems hard to beat. It’s capital-expenditure heavy but can be acquired at a significant discount to replacement cost, even in better primary and secondary markets nationally. As wealth in the U.S. splits high and low, it’s clear more and more American families will need quality housing opportunities in proximity to jobs.

GlobeSt.com: Please comment on the outlook for gateway/secondary/tertiary markets.

Voorhees: Institutional acquisition pressure is off in western secondary and tertiary markets, causing cap rate expansion and – as aforementioned – a super cap rate to 10YT spread opportunity. The cost of living in many secondary and tertiary markets is compelling: The cost of housing PSF relative to average household incomes. In the western markets our team covers, it feels like a buying opportunity for better assets in many of these markets.

GlobeSt.com: What are your thoughts on the yield curve inversion & Fed cutting interest rates? How should that affect investors’ strategies?

Voorhees: I frankly don’t think much about this. The 10YT is predominantly influenced by a global aversion to risk and comparative risk-free returns. I focus on real estate fundamentals and the spread between cap rates and the 10YT, and the ability to buy at- or below-replacement cost in markets with positive growth and demographic trends. It seems clear that the Fed intends to cut short-term rates sooner than later. If/when this happens, the yield curves may no longer be inverted. The prospect of continued global economic slowing certainly points to lower interest rates in the years to come. The Fed does not get to set the 10YT yield; it can adjust short-term rates. As aforementioned, this seems likely to happen, rebalancing the yield curves.

GlobeSt.com: Anything further that you would like to add?

Voorhees: Again, GO LONG! Seven or ten-year financing should be sufficiently long to bridge any impending downturn gap. If you have an asset you are considering selling in the next 2-3 years, you should be heading to the market NOW. Price aggressively on core assets as the falling 10YT will create a tailwind for cap rate compression on the best assets. If you don’t get the pricing you like, then lock long-term debt a historically low if not record low rates. It’s a good time to be active in this market. Doing nothing is also a decision: If you are not selling, you are effectively buying.